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Floyd Norris Asks a Good Question

posted by Bob Lawless

In today's N.Y. Times ($), columnist Floyd Norris asks a good question. Were parts of the 2005 bankruptcy amendments meaningless? Specifically, Mr. Norris writes about a section of the new law that appears to put limits on retention bonuses for executives of bankrupt firms. Mr. Norris details the dispute between the reorganizing Dana Corporation and its creditors. Dana wants to pay its CEO a $3 million bonus for staying with the company until it emerges from bankruptcy.

As the law that eventually emerged in 2005 wended its way through Congress in the early part of this decade, reports appeared about bankrupt corporations signing multimillion dollar contracts with corporate executives to ensure the executives stayed with the company through bankruptcy. If generals make the mistake of always fighting the last war, politicians make the mistake of always solving the last corporate crisis. Hence, the congressional solution was a new law banning payments to induce a corporate insider to remain with the bankrupt business. These payments are allowed only if the insider was essential to the business, the insider had a competing offer to go elsewhere, and the payment was no more than 10 times the amount paid to nonmanagement employees to induce them to stay with the company.

To answer Mr. Norris's question, this particular section is meaningless. The weakness lies in the way the section was drafted, a point I made yesterday about the 2005 law generally. The predicate for its application is that the payment has to be made for purposes of inducing the insider to stay with the business. It is a simple matter to structure a compensation package so the payment is made for other purposes. For example, a bonus payable upon confirmation of a chapter 11 plan or to meet certain performance goals is an incentive payments to meet those goals, not retention payments. I have yet to encounter an attorney doing chapter 11 work who thinks this new provision will have any substantial effect on compensation practices in chapter 11.


There are a lot of decisions in the consumer area where judges are not applying the language of the statute, but are being "creative" to get to the "right" result. However, I doubt that any bankruptcy judges are going to do that in the retention bonus area, although I think that they have as much or more justification for doing so in this area than in some of the consumer issues. In the consumer cases, Congress said that they wanted to set some bright lines, which the judges are ignoring when they think that debtors are "manipulating" them. If they can do that to catch consumer debtors, why can't they do that to prevent management, who are in a self-dealing situation, from rewarding themselves at the expense of creditors and employees? If this were a tax law, wouldntt the IRS say that you have to look at the economic reality of transaction?

Your list of the 10 foreighn holders of U.S. curriencies went beyond my doubts, very surprised about Mexico. In one of my college courses on economics, we discusssed that having a small national debt, like $50,000,000,000 was nothing to lose sleep over. Plese put together thoughts of brights economists today, and share with your readers what exactly does all of this bebt mean. What happens if some countries demand being re-paid, and what happends if we print money if we can't find it elseware. I sense high inflation in the future but most others don't see it that way. Why not?

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